Gold PriceComments Off on Solutions for Everything, Answers to Nothing

Could one day’s Financial Times be the best £2.50 humanity ever spends…?

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.

We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.

We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.

The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.

Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.

Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.

Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.

He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.

Yo, Larry, Earth calling…Have you ever been to New Jersey?

It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.

Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.

What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.

But the fantasy of borrowing for “public investment” soaks the FT.

It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.

How do you stimulate demand?

You try to get people to take on more debt – even though the slowdown was caused by too much debt.

On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:

It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.

On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.

Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.

This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”

The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!

Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy.

We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.

Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.

Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?

Nobody knows. But a serious paper would at least ask.

It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.

But the FT does none of that.

Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.

But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”

But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.

“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”

Aha! Consumers are not doing their part either.

Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.

GOLD MINING costs respond to changes in market price, according to a new study, rather than acting to support or push prices higher as commonly assumed.

“The gold price should and does cause changes in the cost of extraction,” says a summary published today in the London Bullion Market Association’s quarterly magazine, The Alchemist.

Writing jointly with Fergal O’Connor – senior lecturer at York’s St.John Business School in England – and data consultancy Thomson Reuters GFMS’s director of precious metals mining research William Tankard, “The theoretical and empirical evidence points to the fact that gold prices are a determinant of producers’ cash costs,” says Professor Brian Lucey of Trinity College Dublin.

Firstly any rise in market prices will encourage output from otherwise loss-making projects, note the authors, which will raise the industry’s average output cost per ounce. Secondly, annual mine supply (around 3,100 tonnes in 2014) is only a fraction of the amount already above ground (estimated at 180,000 tonnes). So the mining industry lacks the pricing power needed to impose higher costs to buyers, as scrap supplies from existing holders can easily reach market.

This claim challenges the widely-held view that gold mining costs should act as a floor for the gold price in the medium to long term – a view argued by fellow academics Eric Levin and Robert Wright, then respectively at the universities of Glasgow and Strathclyde in Scotland, in a 2006 paper for market-development organization the World Gold Council.

“The long-run price of gold is related to the marginal cost of extraction,” wrote Levin and Wright, whose broader claim – that gold has a close relationship with the rate of inflation in the wider economy – was based in part on the idea that inflation is transmitted to gold prices through rising production costs.

More recently, commodities analysts at investment bank Goldman Sachs said this summer that a likely drop to $1050 in world gold prices by end-2014 will prove “generally short-lived”. Because 90% of the world’s current mine output would be unprofitable on an all-in costs basis at that price, Goldman’s team peg $1200 per ounce as “a good estimate of the floor for gold”.

But looking at direct mining costs – known as “cash costs” in the mining industry – the new claim from Lucey, O’Connor and Tankard is that global averages track market prices, rather than the other way round. The same finding was “confirmed in the vast majority” of national-level gold mining data too, and “also using total production costs.”

The accounting methodology behind “all in sustaining costs” – agreed and applied by the World Gold Council’s gold-mining members in mid-2013 – includes new exploration, capital expenditure and corporate running costs, as well as the direct production cost of each ounce.

All due to report third-quarter earnings at the end of October, the world’s top three gold miners – Barrick (NYSE:ABX), Newmont (NYSE:NEM) and Goldcorp (NYSE:GG) – last reported all-in sustaining costs of $865 per ounce (down 5% from mid-2013), $1063 (down 17%) and $1060 (down 19%) respectively.

GOLD BUYING by central banks has continued ahead of recent averages in 2014, according to several analysts’ notes.

“Central banks remained firmly on the buy-side of the gold market” in the first half of the year, writes Macquarie Bank analyst Matthew Turner in London.

Based on official gold bullion reserves as reported to the International Monetary Fund, Turner notes that his net figure of 113 tonnes for central bank gold-buying in H1 does not account for a 14-tonne drop in Ecuador’s holdings – withdrawn as part of a Dollars for gold swap with US investment bank Goldman Sachs, and set to be unwound with the gold bars returned in two years’ time.

“The Ecuador-Goldman Sachs deal,” agrees another London-based analyst, “simply reiterates that gold is a highly liquid asset that can readily be converted into cash.” A similar deal with the same bank was last year begun but dropped by the socialist government of Venezuela, which under the late Hugo Chavez withdrew its gold bullion reserves from London’s international trading center in what commentators called an attempt to “guard against” US seizure or interference with the Latin American state’s assets overseas.

According to IMF data, Moscow’s gold buying in 2014 rose from 5 tonnes in the first 3 months of 2014 to 55 tonnes between April and June, when the Ukraine crisis intensified after Russia’s annexation of Crimea in March. “Given Russia’s FX reserves have fallen,” says Turner, that “might reflect a preference for gold over government bonds in the current political environment.”

Also noting the increase in Russia’s gold reserves, “We would expect a range of countries who are not aligned with the USA to see ever greater attraction in holding gold as a reserve asset,” writes Mitsui analyst David Jollie, pointing to “indications” in reporting data which suggest Moscow may have reduced its holdings of US Treasury debt.

Even though the US Dollar remains the No.1 central-bank reserve currency, “Any country that might come into political disagreement with the USA might have some fears that it might not be able to use its Dollar reserves,” says Jollie. “And such a country might also have little desire to fund the US Government’s budget deficit too by owning US Treasuries.”

The largest foreign holder of US Treasury bonds, China has not updated the world on its bullion reserves since 2009, when it revised its reported holdings 75% higher to 1,054 tonnes. Beijing is widely suspected of buying gold since then, with unreported central bank purchases explaining a gap between China’s private-sector demand and visible supply.

“China’s nearly $4 trillion in [foreign currency] reserves,” wrote British MP Kwasi Kwarteng – author of new book War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt – last month in the New York Times, “give it plenty of ammunition to claim leadership in the creation of a new monetary order.”

Kwarteng suggests Beijing may be buying gold to prepare for a bullion-backed Yuan – “not in the immediate future…[but] in, say, 20 years.”

Repeating its call for gold to end the year at $1050 – below 2013’s three-year lows – “US economic releases have continued to [improve] while tensions in Ukraine have escalated, keeping gold prices range bound near $1300.”

New data Thursday said US claims for jobless benefits were the lowest last week since 2006.

“Investors going risk-on into equities pushed the gold price lower,” reckons the commodities team at Germany’s Commerzbank in Frankfurt. “Silver followed gold’s trail.”

“The rally in US equities continues to be a headwind for gold,” agrees Australia’s ANZ Bank, “despite safe haven buying providing some support to prices.”

Warning today of a “dire situation” in Gaza, the United Nations also reported that bandit army the Islamic State has ordered mass mutilation of women and girls in the Iraq city of Mosul, under its control since early June.

The Financial Times meantime reports that a pro-Russian separatist leader in eastern Ukraine “came close to an admission of guilt” for killing 298 civilians on Malaysian flight MH17 last week, saying his forces did control a missile launcher of the type believed to have downed the airliner.

“We are mildly bullish for gold this year,” Reuters quotes analyst David Jollie at Japanese trading house Mitsui, “but we feel many of the gains may already have been made.”

That contrasts with the newswire’s survey of 31 market analysts, which earlier this week showed consensus forecasts of a slight annual drop in 2014, with gold prices averaging $1255 in the last 3 months of the year against $1290 over the first half.

While US Fed tapering of its quantitative scheme “should [now] be fully priced in”, says Jollie, the end of that process will however spur “market uncertainty” with regards to when the central bank may raise rates.

IT WAS something of an irony last week when the idiots savants who constitute the upper ranks of the ineffable current incarnation of the IMF decided briefly to forgo their penchant for the politics of the Montagnard – more inflation, higher wages, death to the speculators, les aristocrats à la lanterne, that sort of thing – in favour of those of the ancien régime, writes Sean Corrigan of Diapason Commodities at the Cobden Centre.

Specifically, this took the form of updated proposals for a ‘Visa’ of the kind twice instituted in early 18th century France; the first to try to clear up the fiscal mess which was the principle legacy of the military vainglory of the just departed Sun King and a second time to mop up after that QE disaster of its time, John Law’s infamous ‘System’.

Sorting the participants into five classes whose activities were deemed to have been increasingly speculative – and hence liable to more swingeing penalties – those in charge of the Visa saw to it that the bigger players (or at least those bigger players unable to use their royal connections to secure themselves an indemnity) suffered haircuts, retrospective tax assessments, forcible debt extensions, property confiscation – and, in one or two cases, a salutary trip to the Bastille.

Jump forward three centuries and in its latest position paper on sovereign debt ‘resolution’ the IMF is drooling about dipping, in a not wholly dissimilar fashion, into people’s pension funds and insurance policies – since these are seen to be easy targets – as well as about imposing arbitrary prolongations of tenor on outstanding securities should the state’s chronic mismanagement end up rendering it temporarily unable to entice sufficient new or repeat suckers into enabling the maintenance of its naked fiscal Ponzi scheme.

We are all for adopting a stance of unsentimental realism when it comes to facing problems of over-indebtedness and, further, that we have long bemoaned the readiness of governments to swell their own commitments in the aftermath of financial crises, not just because of the inherent cronyism and inequity which riddles most TBTF assistance packages, but because sovereign debt is intractable in a way that private sector obligations generally are not. We are, therefore, more than happy to see all breaches of contract – which is what the unpayability of a debt involves – dealt with in as clinical and judicial way as possible, no matter whether these failures are misjudgements, examples of malfeasance, of ‘acts of god’. Moreover, we are exceedingly happy to see anything which reminds people that, despite the modern fiction of the ‘risk-free’ rate which attaches to them, Leviathan’s IOUs have always been among the least trustworthy of all pledges to pay.

However, that principal is not what is at issue here, but what does gall is the IMF’s glib reliance on the sneaky, archly legalistic, announce-it-once-the-banks-are-closed repudiation of existing agreements by a borrower which has not only promoted itself as the one true guardian of the people’s well-being, but which has frequently given its subjects precious little choice but to trust a goodly part of the surplus they have wrung from their already sorely-taxed income to those same instruments whose terms the state is now unilaterally amending in its favour.

As yet one more example of the sinister creed of ‘Gemeinnutz geht vor Eigennutz’, this betrays the classic statist proclivity to view all notionally private property as really belonging to the Collective, even if this is rarely expressed so clearly today as it was when last elevated into a central tenet of axe-and-bundle political theory in the 1920s and 30s.

“What’s yours is only truly so to the extent that we, the functionaries of the Hive, do not decide that we have a better use for it and so do not exercise what we insist is our prior claim to it,” they imply, though a little more disingenuously than heretofore.

Having ignited an all too short-lived burst of outrage at last year’s more overt Visa proposal to go for a straight confiscation of 10% of ‘wealth’, this latest business of simply denying people an exit route has the poisonous virtue of being more subtle in its operation and therefore of being more likely to pass into effect all unremarked, even if the effect upon those being locked in would be broadly equivalent in many respects.

Moreover, for all the weasel words uttered in the Fund’s blueprint about limiting moral hazard, the plan explicitly endorses what it archly terms the ‘reprofiling’ measure on the grounds that it serves to deliver a ‘larger creditor base’ into the meat-grinder and hence helps limit damage to ‘longer-term creditors who would have otherwise had to shoulder the full burden of the debt reduction’ As an added bonus, stiffing one’s existing creditors in place of begging a payday loan from Uncle IMF ‘…increases the chances of a more rapid return to the market, as the debt stock will be less burdened by senior claims’ – i.e., those emanating from the IMF itself. A third, tacit advantage would be that since the IMF would not be not committing an actual monies, there need be no debate among its members about the implementation of such a programme, while the softening of the criteria calling for its use from one where the state’s finances are categorically ‘unsustainable’ to one where there is a mere inability to rule out the arrival of such a contingency drastically lowers the nuclear threshold.

One might object that the very knowledge that such steps could be taken would be enough to destroy any residual element of ‘sustainability’ with which a given sovereign’s budget might otherwise be imbued. If people became aware that in buying a 3-month T-bill (and buying it at vanishingly small rates of interest at that) they were also selling their overlords a 30-year put, or that the YTW calculation of their security really ought to include the chance of a 10% principal reduction, would they not try to incorporate this in its price, thereby pushing up yields and so aggravating any incipient funding difficulties? Might they, indeed, not halt their discretionary purchases altogether and so advance rather than retard the onset of the crisis?

Given that they are each, in their own way, subject to the compulsions of so-called ‘prudential’ regulations with regard to the assets they must hold to ensure their solvency and liquidity, would such ‘captives’ as the banks, pension funds, and insurers thus be left the only buyers outside of the ever-eager to oblige central bank? A moment’s consideration of what could happen to the most fragile of these – the already-impaired banks – if their assets were suddenly to suffer another sizeable mark down as a result of state defalcation shows why the IMF wants the universe of the afflicted to be as all-inclusive as possible. That way, however large the absolute loss might be, the percentage loss to each holder could be conveniently minimized as the poor individual innocent was once again mulcted to provide a subsidy for the rich, corporate players whose fate is so closely entwined with that of their overlords.

Thus, under the terms of this new wheeze, we might imagine a day when the following missive drops onto the doormat of the Forgotten Men and Women up and down the country

“Dear Grandma and Grandad, thank you for making the valiant effort over these past decades to achieve a measure of self-reliance in your dotage and for allowing us jacks-in-office full use of your savings in the meanwhile as both a means to fulfil our political ambitions and as a way to act out our own economically-illiterate and usually illiberal prejudices at the expense of you and yours.

“Sadly, it transpires that we have not only wasted a goodly part of your savings, but we have greatly added to the host of irredeemable promises which we made to you, in the form of a mountain of even more pressing pledges issued to the Biggest of Big Fish in the financial markets. So that we do not entirely dissuade these latter sophisticates from again indulging our follies at the earliest opportunity, we shall now have to ask you to share – and thereby greatly to reduce – their pain.

“Be assured, however, that the loss for which you have my heartfelt sympathy will patriotically ensure that we can continue to live well beyond our means. In this way your sacrifice will see to it that the least possible harm will come to any of us in the political classes (a.k.a. the agents of your misfortune), to our army of placemen, patronage-seekers, and dole-gatherers, or to our plutocratic enablers for – as the IMF puts it – ‘…resources that would otherwise have been paid out to creditors will have been retained [to] reduce [our] overall financing needs.’ Nor will we have to suffer the indignity of modifying our existing approach overmuch by actually only spending money on the things for which you, in true democratic fashion, have openly voted the taxes since – here let me cite those marvellous chaps in Washington, once again – ‘resources could be efficiently employed to allow for a less constraining adjustment path.’, i.e., to allow one demanding as little fundamental ‘adjustment’ as possible.

“I feel confident you will join me in looking forward with some enthusiasm to the next, inevitable ‘reprofiling’, just as soon as we can arrange to overspend enough to make one necessary once again. Should I have already laid down the heavy burden of selfless public service by the time this comes about and gone instead to my just reward as a highly-paid ‘consultant’ to a global investment bank, I would urge you to give your full support to my successor, of whatever political stripe he or she may be. In such an event, there will, of course, be precious little different in the treatment you receive at the hands of any of the mainstream parties as currently constituted.

“Yours Insincerely, The Minister of Finance.”

It is all too easy at present to make fun of the IMF, though in so doing we should bear in mind that such ridicule is perhaps the only weapon we have in our fight to prevent it from lending a spurious air of rationality to the worst predilections of our national nomenklatura.

A case in point is that, at the conclusion of its periodic, Article IV review of the economic condition of the homeland of so many of those in the upper reaches of the Fund, the website prominently carried the triumphant banner, “France: Policies on the Right Track“!

Truly, you could not make this up. For a slightly less self-justificatory assessment, one only has to trawl briefly through the Bloomberg series or consult the most recent verdict of the official ‘auditor’ of the nation, the Cours de Comptes.

There it becomes readily apparent that while the two decades prior to the first oil shock saw Real GDP, ex-government trend upward at a 5.5% annualized rate, and the next three decades managed 2.3% compound, the last seven years have seen no progress made whatsoever. Similarly, real capital formation by non-financial business has decelerated from 7.5% to 2.9% to zero over those same divisions of time. Exports stand at close to a 6 ½ year low and two-way trade at the weakest in more than three years. Industrial output – a whisker off the worst since the rebound from the GFC – lies 13% below its peak and hence no higher than it first reached in 1988

Government expenditures, meanwhile, have swollen to a record 58% of overall GDP, 80% of private, with taxes some 4-5% behind. These are levels only exceeded in the EU by Finland, Denmark, Greece, and Slovenia. The EU-calibrated debt:GDP ratio has risen by 30% of GDP since the Crash and by 12% since 2010 alone (that latter a slippage of 15% compared to the German pathway from an almost identical starting point). Here, fast approaching €2 trillion outright, it stands at 94% of overall GDP and therefore at 120% of that of the private component out of whose income that debt must be ultimately serviced.

Yes, policies are indeed on the right track, assuming that track itself is an economic highway to hell.

Given the foregoing, it was of note that the Governor of the Banque de France, Christian Noyer, insisted over the weekend that it might be highly counter-productive to speculate publicly about any programme of even partial debt repudiation.

“This all corresponds to a somewhat contrived definition of sustainability and ignores the highly disruptive effects…besides, it relies on a very pessimistic growth outlook,” he argued.

“Once one starts not to pay ones debts, borrowing becomes very expensive and the impact on growth greatly exceeds that of managing a gentle reduction in debt.”

The only problem with such a judgement is that M. Noyer’s preferred – if sometimes implicit – remedy is for a reinforcement of the policies which have so signally failed France over the past several years – viz., further extreme monetization of assets (to include equities, if need be) and a weaker currency.

As a result, we find ourselves ensnared in a nest of Keynesian paradoxes and economic canards. We need more investment, we are told, but the only means we can imagine to stimulate it is to lower interest rates. We understand that debt levels are too high, but we are so terrified that they might actually begin to be reduced that we subsidize profligacy as the default option of policy. We fret that prices of assets are rising as a result, not the price of labour (which we implicitly want to increase so we can reduce debt ratios, rather than debt itself) and in order to offset a form of inequality we ourselves have engendered, we stultify an economy already overburdened with rules and regulations with that en vogue form of top-down, baby-with-the-bathwater interference we style ‘macroprudential’ policy.

We want to see more people in work, on the one hand we work manfully to introduce ingenious tax and benefit ‘wedges’ which act to discourage marginal job seekers and, on the other, we call for the cost of labour to be raised through higher minimum wage rates (and or plain-old monetary inflation). We decry the fact that businesses will not hire while lowering the prospective economic returns to such hiring by seeking to tax profits more heavily.

The reality is that it does not have to be like this. The curse of macroeconomics is that it takes what should be a crude metalanguage which merely attempts the convenient shorthand of describing an impossibly complex but largely self-organising whole using a few, hopefully representative general features and attempts to elevate it into a rigorous, cybernetic control system to be twiddled and fiddled by the fingers of Philosopher Kings. Given this assertion, let us try instead to work from the other – the microeconomic – end and see if we can shed a little light on this dark and dismal scene.

If Robinson Crusoe wishes to survive his enforced sojourn on his remote island, he must only engage in such activities as provide him with a flow of the needs – at their most elementary, sustenance and shelter – that is at minimum no smaller than their accomplishment costs him in the expenditure of time and effort. The more astute he is in doing this, the more alert and adaptable he is in going about it, the wider will be the margin of success he enjoys, the more rapidly his most essential requirements will be satisfied, and the sooner he can move on to meeting a broader range of desires and to building up a precautionary reserve against misfortune.

It should then be obvious that, when Friday washes up over the reef, Crusoe – unless driven by an inexhaustible fund of potentially-self-endangering altruism – will not be able to offer his new companion an ongoing share in his accomplishments, free access to his stock of implements, or the instant ability to draw upon his, Crusoe’s, hard-won skill and understanding if Friday does not at the very least act in a manner which exacts no net toll of Crusoe (including the unseen one of foregoing better opportunities for gain in their use elsewhere). In fact, he would be unlikely to take the risk of depleting his own scarce resources and of squandering his finite energies if Friday does not contribute something beyond such a bare material parity, the which surplus he, Crusoe, will be able to use to increase the future possibilities open for the two of them to exploit.

If we stop to think about it clearly, Crusoe’s surplus income – and let us not be shy to call this his profit – is what enables him firstly to improve his own standard of living (to invest) and eventually to afford Friday the means with which to leapfrog away from the perils and privation of shipwrecked destitution to the more secure and less impoverished existence he may lead if he contracts to work under the guidance of Crusoe’s entrepreneurial instincts while utilising some of Crusoe’s already-produced stock of capital. For this, Friday earns himself the right to avail himself of an agreed proportion of the goods (the income) they generate through their mutual collaboration. Once more, it is Crusoe who rightly accedes to and disposes of any subsequent excess which he by his craft, and they two by their sweat, can conjure out of the unforgiving surroundings of their savage little world.

Assuming Crusoe to be as diligent in his way as Friday is in his, the generation of each successive surplus will allow Crusoe progressively to improve the quality, quantity, and variety of means they each can employ, so that Friday, as well as he, can enjoy those better returns on his effort which accrue from the fact that his capital endowment has risen, those better returns being what we call a higher real wage.

It is all very well to bewail the fact that, in the modern world, the admirably rugged individual, Crusoe, has been transformed into that bête noire of the scribbling and scriptwriting classes – the faceless and vaguely sinister Crusoe Incorporated – and it may equally be a matter of unthinking dogma that ‘profit’ like ‘property’ is theft, but the truth remains that what applied to our pairing of Lost-prequel cast members still applies in the disembodied world of distributed shareholding and managerial agency: profit is both the sign of entrepreneurial success and the seedcorn of capital provision; labour will only be – can only be – hired if the value of its product exceeds the cost of its retention; and the more capital each worker has at his disposal (including the kind contained between his ears), the greater will be the likely worth of his product and hence the more lavish his reward.

There are no short cuts on offer. Or perhaps none which bear up to the test of self-sustainability. Thus, the would-be macro-puppeteers of the kind characterised by deputy Bank of England governor Jon Cunliffe when he waxed metaphorical in a recent speech about how the Old Lady’s duty was to “steer” the economy “at the highest speed that can be achieved…down a winding road” can be seen both to seriously overate their powers to do good and to vastly underestimate their proclivity to do harm.

Allow a man the scope both to make and keep a profit (to win receipts greater than costs, adjusted for the passage of time); place no restrictions on the terms of the mutually-beneficial, freely-contracted co-operation into which he enters with less adventurous, but no less assiduous, persons as he seeks to do so; do as little as possible to add to the costs of any such contract (monetary manipulation herein included) and thus to dissuade either party from entering into it; subject our man to no deterrent to ploughing the fruits of this cycle’s endeavours back into the attempt to make those of the next more succulent and more plentiful and, by and large, though failures will occur and frauds will not be unknown, all those involved will flourish – even if they happen to live in a France where, the last we heard, the laws of economics still applied and where it was not the people who were failing but those who ruled over them.

But let us not to be too unfair to the worthies who reside among the splendours of the Elysée, the Matignon, or Bercy: as the Cours de Comptes points out, the performance of their counterparts on the other side of the Channel has in many ways been just as unimpressive.

The UK, after all, still runs a deficit of around £100 billion a year, 6% of total and 8% of private sector GDP. Net debt of more than £1.4 trillion amounts to 85% of overall and 110% of private GDP (even without counting in the obligations pertaining to the bailed-out banks) and has doubled in five years, tripled in nine. Total spending has risen by a half since 2005, climbing 5% of pGDP in that time to reach a very lofty 52.5% – and this despite all the bleating about swingeing ‘austerity’. The £650 billion which comprises that churn amounts to around £200, or more than 31 hours of minimum wage pay, per week for every man, woman, and child in the country. Not entirely unrelated is the fact that the current account gap yawns as wide as £75 billion a year, equivalent to what is fast approaching a post-war record of 4.5% of total, 6% of private GDP.

Here, too, the optimists have been somewhat deceived by their hopes of undergoing a true economic revival. Though the series is bumpy, manufacturing output in May appears to have stalled, suffering its largest drop since the harsh winter of 2013 and leaving overall industrial production barely 3.5% off 2012′s 27-year lows and still having 80% of its GFC losses to make up.

Despite the glaringly obvious construction that the UK is once more undergoing a lax money, too-low interest rate, classic, Tory Chancellor pre-election boom – all about non-tradables, a housing mania, an excess of imports, and plagued with soft-budget government incontinence – the myopically GDP-fixated macromancers cannot resist becoming ecstatic at the results.

Jack Meaning, a research fellow at the highly-regarded National Institute of Economic and Social Research, for example, was quoted this week in the broadsheets in full Trumpet Voluntary mode:

“The outlook is very positive,” he exulted. “Growth now is very much entrenched, and given all the positive data that has come out, it looks like growth is here to stay.”

Hmmmm! While it is true that the Carney-Osborne duumvirate will do nothing to restrict access to the punch bowl:

before the Scottish Independence referendum;

before the UK General Election next spring; and

if it can be managed, before our beloved Governor quits (in 2017…?) to leave his palm print on the pavement of Grauman’s Chinese Theater en route to what is rumoured to be his apotheosis at the pinnacle of the Canadian Liberal Party hierarchy,

then the longer this particular locomotive of ‘growth’ progresses along its current track, the more certain we can be that it will terminate in the same, drear Vale of Tears where all its predecessors have hit the buffers.

As for the US – where policy has retrogressed through some sort of Phillips Curve warping of the space-time continuum to make un(der)employment the only real matter of concern – well, let’s not get too bogged down in the to and fro about Birth:Death adjustments, the household versus the establishment survey, competing explanations for a falling participation rate, part-time versus full-time job issues and all the rest of the minutiae.

Taking the data at face value, private sector jobs (adding agriculture and self-employed to the establishment total) seem to have risen over the whole of the last four years by a remarkably steady 180k a month, 1.8% a year, for a cumulative 870k gain which is pretty much in tune with the simultaneous official estimate of 910k in population growth. While similar to the pace mapped out in the 2003/07 expansion (then 210k and 1.6% off a higher base), this is one of the slower episodes in the last half century. If we calculate the real wage fund (2.1% outright and 1.4% per capita) or real private GDP (3.0% outright and 2.3% per capita) we get similar results: the US private sector has been expanding reasonably, if a little tardily, in real terms though it has also been more obviously lagging in nominal ones.

Why no faster rebound? Certainly not because interest rates are too high, or government outlays too parsimonious, or because the ‘low-hanging fruit’ of human progress has been well and truly plucked to leave us the unpalatable choice between ‘secular stagnation’ and an invigorating burst of warfare.

Read the Crusoe paragraphs again: incentives matter, especially at the margin. And among the many perverse incentives to limit hiring we have, just as in the 1930s, a whole host of programmatic and regulatory barriers to take into account – extended benefits, changes to health care, access to classification as ‘disabled’, unemployment insurance rules, and so on.

Though America is not as sorely afflicted with these hindrances as are many Western nations, it is not hard to see that the sort of work done by Richard Vedder and Lowell Galloway, by Lee Ohanian, by Robert Higgs, and lately by Casey Mulligan all come back to the same basic conclusion: that for the micro-economics of job-creation to take hold, the legal and institutional framework must not only be conducive to fostering the hope of gain among those seeking to employ both capital and labour (including their own), but it must be straightforward to negotiate and stable in its composition. Neither constant bureaucratic tampering, nor wrenching shifts in fiscal or monetary policy – with all the wilder swings they transmit via the financial markets through which they act – can contribute much that is positive, for all the arrogance of the Colossi who never cease to promulgate them.

But the “sharp recovery” after those figures – the strongest US jobs addition since 2012 – “underlines the current strength in demand for gold.”

“We interpret [gold’s recovery] as a sign of relative strength,” agree analysts at Commerzbank in Frankfurt.

But “the market had a bearish tinge on the better macro data coming out of the US and China,” counters Citigroup analyst David Wilson, quoted by Bloomberg.

Friday’s weak German factory orders – reported 1.7% below April – “may have modestly dented some of that macro optimism,” he says, spurring strength in gold.

Silver “swiftly rebounded” after Thursday’s US jobs data, adds the commodities team at Deutsche Bank – which today sold its trading book in coal, iron ore and freight to investment bank Morgan Stanley.

“Hence we still see silver as robust and adhere to a bullish objective at $21.92 to $21.99,” it said.

“The real test for gold,” reckons London bullion market-maker HSBC, “may be the return of market participants following the [Fourth July] holiday.”

“Liquidity is again thin today,” Reuters quotes a Tokyo trader, “because of the US holiday.

“But when we see bigger volumes from Monday, gold will resume its decline as long positions are unwound.”

Today’s holiday delays the latest data from US regulators on hedge-fund and industry positions in gold and silver derivatives until Monday.

Summer is typically boring for gold, and by extension silver prices. (The median move during June-August is the smallest 3-month change over the last 45 years, stats fans.) But 2014 has seen both gold and silver prices buck the seasonal lull so far. June saw gold add 6% against the Dollar. Silver doubled that move.

But we can’t find many other commentators noting that, derivatives trading aside, June was actually quiet for silver investment demand. Indeed, after May’s stellar addition to BullionVault user holdings – the largest 1-month rise since end-2012 – holdings were flat overall last month as more users opted to take profit than buy more following the sharp leap through $19…$20…and then $21 per ounce.

The rise in gold and silver prices meantime hit those hot-money traders betting against them so badly, they all ran to the other side…and at a record pace.

The question now is whether there’s any cash left to join the bullish betting short term.

Every Friday, after the futures market closes in New York, US regulators print data showing how traders were positioned the previous Tuesday. Tracking the changes lets you see what the big money is thinking. If it’s thinking at all.

On one side are the “commercials”…the producers and merchants who make a living selling the stuff. On the other are the “speculators”…the hot-money funds who try to make a living betting which way prices will move.

Now, at the start of last month, the specs were holding more bets against silver prices than ever before. Looked at as a group overall, they were “net short” silver (bullish minus bearish bets) for the first time in 11 years.

This made sense from a technical view. Silver prices, like gold, were marking a tight range which only got tighter. Higher lows and lower highs created a triangle shape. Technical analysts studying chart patterns could see the final corner drawing near. Hitting that apex as time rolled by, silver would either shoot higher or, they guessed, sink hard. But then Janet Yellen spoke…coughing about how maybe the Fed won’t actually ever, y’know, raise interest rates from zero…and the precious metals shot right where the silver shorts hoped they wouldn’t.

Having started with a record large speculative short bet against silver, June saw the fastest swing in bullish betting on silver, net of bearish contracts, on record. The so-called spec net long rose 150%…swelling over $2bn by value…and growing faster than any week since at least 1986 as prices jumped.

Speculative gold betting was similarly dramatic in the week-ending last Tuesday. Faster than January 2012, the jump in net bullish betting totaled some $7.3bn. That jump is beaten only by mid-July 2011, when the US debt downgrade and Eurozone debt crisis sparked that summer’s record peak in gold prices.

All told then, June 2014 saw $13bn-worth of speculative bets jump onto the long side of gold and silver contracts at the US Comex exchange. So like we suggested to Bloomberg’s Alix Steel last week, the hot money has run to the other side very fast.

This has proven a welcome dose of good luck for physical investors in silver bars wanting to pocket a tidy gain for the summer. But further ahead?

Volatility in silver prices has jumped from early June’s 7-year low. But options contracts will still look relatively cheap to hot-money players wanting to find action somewhere…anywhere…in financial markets which have turned distinctly boring everywhere. Pushing silver prices north by taking the other side of the bet will surely appeal;

Industrial demand looks solid. Added to silverware demand, in fact, it’s likely to match silver mine output for the first time since 2011…and mine-supply growth is set to flatline from 2015 according to French investment bank and London market maker Societe Generale;

Physical investment meantime remains strong, defying long-term industry experts as private buyers just keep on stackin’. But ETF trust fund traders are no more immune to a little profit-taking that BullionVault users. The big SLV trust fund has shed 1.3% of its holdings since Friday 22 June, some 140 tonnes.

With silver up 12% in 4 weeks, why not?

Bottom line, silver is volatile enough without needing to borrow money…and multiply your risk of ugly losses as well as profit…to play the futures or options market. Let the hedge funds set themselves up for a fall if they wish.

As for choosing silver over gold, that’s a tough call. But when silver moves in the same direction as gold (some 75% of all trading days since 1968) the cash price moves very much faster.

Three to four times as fast in fact. That cuts both ways remember. Up and down.

COMMODITIES INVESTING is “returning to normal” according to a new report, losing the strong correlation with world stockmarkets seen during and after the global financial crisis just as major banks pull out of the natural resources market.

Barclays this week became the fourth global bank to announce it’s closing its commodities division, following J.P.Morgan, Morgan Stanley and Deutsche Bank in refocusing activity away from natural resources.

Yet for investors, “Commodities are [now] generating stable returns amidst turbulent global capital markets with lower volatility compared to equities and bonds,” says a new report from Citigroup Research, a division of the global bank.

“This appears to represent a return to normal,” Citi’s report concludes, with commodities and stockmarket investments moving in different directions, rather than being strongly tied to one another as became the case “especially in the lead up to the financial crisis in 2007-09 and even more so in the immediate aftermath.”

The exit of major banks from commodities investing was last week cited as a key reason for that falling correlation with stock markets by United Nations’ analysts.

“The influence of banks and hedge funds on commodities is at its lowest since 2008,” said an update from the the UN Conference on Trade and Development (UNCTAD), quoted by Reuters.

“As financial investors including banks and hedge funds have reduced their activity in commodities markets in the last two years,” it explained, “we’ve seen a marked drop in the correlation between the returns on the equity markets and the returns on oil and other commodities futures markets.”

Currently the second-biggest retail bank in the UK, Barclays will retain its precious metals activities, moving its market-making bullion team to its foreign exchange division. But other commodities will go “electronic”, with clients offered derivatives and exchange-traded index products.

Fellow London bullion market makers Deutsche Bank and J.P.Morgan have also retained their gold and silver trading businesses, although Deutsche – which took 200-tonnes of gold vaulting space in Singapore’s Freeport facilities last June – is looking to sell its membership of the London Gold Fixing Limited.

Barclays currently chairs the twice-daily London Gold Fix. It opened a dedicated London gold and silver vault in 2012, becoming only the third of London’s 11 market-making bullion banks to operate its own facilities. The bank’s 2013 annual report shows that, amongst £588.7 billion of assets held at fair value ($957bn), it ended the year holding assets of £10.2bn ($16.8bn) in commodities derivatives and £4.2bn ($6.8bn) in physical commodities.

“The retrenchment [by major banks] may leave rich opportunities for commodity merchants,” says the New York Times, citing Switzerland’s Mercuria – now buying J.P.Morgan’s commodities investing business for $3.5bn – and Glencore Xstrata, neither of whom “face the same stringent regulations and capital requirements as banks.”

“The more banks that exit commodities trading,” Bloomberg quotes analyst Jeffery Harte at Sandler O’Neill & Partners, “the less competitive it becomes for the banks which stick with it.” With Barclays, Deutsche, J.P.Morgan and Morgan Stanley quitting or reducing their commodities business, US investment bank Goldman Sachs “now has a much bigger piece of a much smaller pie,” he says.

Notes to Barclays’ 2013 accounts point out that the European Commission’s proposed Liikanen directive would, amongst other things, ban globally significant banks from trading financial instruments and commodities for their own profit/loss account (known as proprietary or “prop” trading).

The United States’ Dodd-Frank Act meantime seeks to impose position limits on banks and other entities trading derivatives on physical commodities, Barclays’ annual report also adds.

“These rules could restrict trading activity, reducing trading opportunities and market liquidity and potentially increasing the cost of hedging transactions and the volatility of the relevant markets,” it says.

Matthew Cimmino worked on the Comex futures exchange as a trader and broker for 22 years for his own account. Prior to that he worked for Goldman Sachs, running the day-to-day operations of the investment bank’s entire Comex floor staff.

Having also worked for Bankers Trust and Flex Trade, he managed a $2 billion metals book with Winkleman, Suskind, Riley, Yee and Lloyd Blankfein, making markets and trading throughout the day.

This week Matthew told me about the capabilities of StrategyDB to backtest trading scenarios. Analyzing what might happen to commodity markets due to the Ukraine situation, for instance, he said that Russia’s battle with Georgia in 2008 could be a good example of how things develop.

Before entering any market, “The most important thing an individual trader should consider,” Matthew Cimmino says, “is to consider three things…

“First, know how much you are willing to risk in advance before it affects your quality of life, and stick to it.

“Second, know your costs. The commissions you pay to trade should be calculated into your model.

“Finally, what kind of a trader do you wish to be? The choices are a day, medium or long term trader. This decision will direct the kind of trading strategies a trader needs to apply.”

What about High Frequency Trading, I asked. Is it bad for the mass of investors, as Michael Lewis’ new best-seller Flash Boys contends?

Matthew Cimmino said that middlemen have always been inherent in the markets, and that is likely to continue. What’s more, he appreciates the liquidity that comes with technology, and the high-frequency competition in asset markets which computerized trading programs bring.

One proposal to address the concerns raised is to impose a tax on all transactions, or on positions held for very short periods. Instead, however, they might better be resolved by the exchanges moving to charge messaging fees, Mr.Cimmino suggests, with HFT users paying to query an exchange’s database of bids and offers many times a second.

Gold PriceComments Off on Silver Prices Take a Beating on Crimea and Fed Chair Yellen’s Interest-Rate Forecast

SILVER PRICES dropped significantly last week, losing 3.8% at Friday’s London Fix from the week before after Russia’s takeover of Crimea failed to buoy precious metals, and the US Federal Reserve brought forward the likely date for raising interest rates from zero.

Fixing at $20.55 per ounce on Friday in London, silver prices stood nearly 7% below the 4-month high established in late February.

Silver futures contracts for May, the most actively traded month on the US Comex, settled at $20.31 per ounce, over 5% lower than last week and $1.50 lower than the peak of February.

US stock markets crept higher, and bond yields rose sharply after the Federal Reserve continued its tapering of QE asset purchases Wednesday, and revised its outlook for finally raising interest rates from zero.

Ten-year Treasury rates reversed all of the previous week’s drop to reach 2.79% after Federal Reserve chairman Janet Yellen’s said short-term rates could be raised “around six months” after the Fed’s QE program is complete.

As QE tapering is expected to end new asset purchases in April or May 2015, this indicates higher rates beginning late 2015, and traders began selling zero-yielding silver – typical with expectations of higher interest rates.

“The metal is now sitting back in the range that traded from late November through mid-February, and is poised for further weakness,” says technical analysis from ScotiaMocatta, a market-maker on the London silver bullion market.

Scotia’s analysis now target’s “a test of the bottom at $18.83” per ounce.

Also seeing silver prices in a trading range, “Silver took support at last December’s lows of $18.90,” agrees chart analysis from French investment bank and London bullion market-maker Societe Generale, saying that level “confirmed a double bottom pattern.”

Open interest on the Comex silver futures contract, which indicates the growth or decline of activity, was reported at 145,986 contracts at Friday’s close, up some 2.8% from the previous week.

The Commitment of Traders Report, based on positions as of Tuesday, still shows that speculative interest in the market is bullish. But non-industry players cut their long position by 2,292 contracts.

For March so far, the US Mint meantime reported sales of 1-ounce Silver Eagle coins on pace for a 17% decline from the same month last year at 3,283,500.

Looking at the ongoing Crimea crisis, “Our economist views the risk of more wide-reaching trade and financial sanctions to be quite limited for now,” said Friday’s Market Report by Edel Tully at Swiss investment and bullion bank UBS.

“[This] is only likely to come into play if Russian armed forces spread their presence into Eastern Ukraine.”